China Stock markets is domestically lead, until it opens up it’s financial markets

Based on the presupposition that all is well on the macroeconomic front, commentators on the Chinese stock market invariably lead readers to a dead end by raising the question – Why has the stock market performed so miserably?

There is, indeed, no answer to this question unless that basic premise is open to dispute. The fundamental change taking place in the macroeconomic matrix will determine the longer-term stock market trend, irrespective of the short-term fluctuations with which many analysts and punters are so obviously obsessed.

By any standard the economy is not doing badly, maintaining growth of more than 7.5 percent even in these difficult times. But such a growth rate, when put into context, represents a marked slowdown from the average double-digit annual expansion of past decades.

The slower-than-expected growth in the first quarter of 2013, at 7.7 percent, is widely seen as a sign of a weak recovery from the stumble in 2012 when the growth rate of 7.8 percent was a 13-year low. The government is projecting even lower growth for 2013 – 7.5 percent.

The latest figures show that industrial output rose 8.9 percent in March, slower than earlier expectations of about 10 percent, as the export sector, which has for many years been the main driving force for economic growth, continues to be hit by declining overseas demand and the rising costs of labor and land.

More worrying still is the room for increased investment spending to spur growth is limited by concerns about inflation and the pumping up of asset bubbles, particularly real estate, that the government has been trying to contain over the past few years. In the first quarter of this year, fixed-asset investment rose 20.9 percent from a year earlier period, which missed analysts earlier prediction of 21 percent.

The government long ago saw the need to rebalance the economy by boosting domestic consumption. Some economists hold the view that a slower pace of economic growth can be helpful in achieving the goal of economic restructuring, as it will enable policymakers to address long-standing issues without having to worry about pumping in resources to meet the pressing demands of the fastest growing sectors, as they had to do in the past.

Meanwhile, the government has laid out an ambitious plan for financial reform and stepped up the timetable for the internationalization of the renminbi. In the past few years, the government has introduced numerous measures to progressively free interest rates and to enable a wider use of the renminbi in international trade settlements. In addition, it has helped nurture an offshore renminbi center in Hong Kong and initiated pilot reforms in the lending market in Wenzhou, the hotbed of private-sector manufacturing enterprises in Zhejiang province.

In the short term, analysts expect the government will continue to pursue a loose monetary policy to spur growth, while easing the rules to encourage more enterprises to raise capital in the corporate bond market. The aim, as one central bank official put it, is to lower the cost of borrowing for the corporate sector.

All these should be good news for the stock market. But many investors have remained wary of the potential fallout. They are not sure how well the corporate sector can adjust to the expected sea change in the business environment brought about by economic restructuring and financial reform.

As such, the Chinese stock market isn’t shrouded in layers of mystery as some commentators have suggested. It is actually as effective a barometer of the economy as the stock markets in the United States or Japan, whose latest show of strength are a reflection of investors’ growing confidence that a sustainable economic recovery is emerging.

The Chinese stock market is simply telling a different story.

The author is a current affairs commentator.

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Most of the investors in China stock markets are domestic in nature, until it open up it’s financial markets, demand will spike as the fundamentals are still good, and a recovery is in the horizons, most foreign investors are directly investing in the business, growth is better than the returns from the stock market at present, but things will soon change once the firewall is taken down, and the foreign financial firms will rush to setup their headquarters there, to compete in the economic pie, now at present as the transformation is still not clear, as the rules of competition is yet to be finalised, just as the laws. Other than creating the framework, most institutions are state owned enterprises, foreign investors need to know their positions and the competition they face, their calculation of ROI, and their exposure of risks. Once you are able to see from their point and install reforms, FDI is not an issue at all.

– Contributed by Oogle.

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